It may be one of the best-known names on the British high street, but one bank reckons JD Sports Fashion PLC (LSE:JD.) is still struggling to find its footing in a market where the rules are changing fast.
Investors hoping for a comeback story may have to be patient.
In a note out on Wednesday, UBS said the low bar set for JD’s performance was not enough to drive a lasting rebound in the share price.
While the company has rallied 19% in recent days, the bank has cut its 12-month price target to 84p, down from 103p, and kept its rating at 'neutral'.
That still implies some upside from the current price around 75p, but nothing to shout about.
The big drag? Nike. UBS said JD’s fortunes remain closely tied to the US giant, and at the moment, and its recovery is taking longer than expected.
Promotional activity is up, new products aren’t yet hitting the mark, and iconic franchises like Air Force 1 and Jordan 1 continue to lose steam. JD is heavily exposed to those lines, and that’s weighing on sales, particularly in North America.
UBS also flagged that JD’s relatively high reliance on apparel (around a third of sales) isn’t helping, since recovery in that part of the market tends to lag footwear.
It doesn’t help that younger consumers, who are a core audience for JD, are feeling the pinch more than most. In short, even if Nike gets its act together, it may take longer for JD to see the benefit.
On top of that, the bank’s survey work shows JD has lost ground with shoppers. Fewer consumers say it’s their preferred retail destination. And with Nike increasingly pushing direct-to-consumer sales, JD faces growing competition; not just from other retailers, but from the brand it relies on most.
UBS was also cautious on the recent acquisition of US chain Hibbett. While the deal could help JD expand in the world’s biggest sportswear market, the southern states where Hibbett is strongest are becoming more competitive.
Academy Sports, for example, is getting more Nike product and rolling out major campaigns. UBS said JD may need to reinvest some expected cost savings just to stay in the game.
In short, the investment case for JD is changing. UBS expects growth to slow, margins to stabilise only gradually, and earnings to come under pressure in the near term. It’s lowered its earnings forecasts by as much as 8% across the next three years.
Investors may be encouraged by recent share price strength, but UBS’s view is plain: without a clear sign of improvement at Nike (and with JD still exposed to a tricky North American market) a proper turnaround could be some way off.
Barclays also removed its negative rating on JD, saying "Nike risks are better discounted", financial controls are improving and free cash flow is rising.
Moving to an 'equal weight' rating from a previous 'underweight', Barclays said the previous negative stance on JD was based on a number of concerns, including circa 50% revenue exposure to Nike, where "brand heat has been weak", as well as risks and concerns in relation to financial controls and /communication, as well as poor free cash flow conversion.
Furthermore, management incentives focused on EPS growth, with no guardrail for return on invested capital (ROCI) "potentially encouraged spending on M&A/new stores to grow EPS at the expense of ROIC".
While there are "clearly new risks in relation to tariffs/recession", Barclays said "many of our stock-specific concerns either addressed or partly discounted" it no longer considers the risk-v-reward as skewed to the downside.